Globalization and Liberalization: Effects of International Economic Relations on Poverty - UNCTAD - 1996

Introduction to the book

Globalization as a term refers to the growing interaction of countries in world trade, foreign direct investment and capital markets. The globalization process has been abetted by technological advances in transport and communications, and by a rapid liberalization and deregulation of trade and capital flows, both at the national and international levels. A growing number of developing countries are benefitting from this increased dispersion of economic activity, while countries with initial conditions that make them less suited to take advantage of the opportunities presented by globalization are at risk of becoming further marginalized.

The implications of globalization for poverty reduction are conjectural and, hence, a matter of dispute. While the estimated creation of 20 million jobs in the developing countries as a result of exports to the developed countries is far from negligible, this sum nevertheless amounts to an addition of only between 1 and 2 percentage points to the share of manufacturing in total employment in the developing countries. However, the effects of globalization on poverty do not end with the number of jobs created and their multiplier effects on the economy. The related adoption of liberalization policies could have long-term social as well as economic effects that might considerably surpass the direct impact of trade, foreign direct investment and portfolio investment. Opinions differ, however, as to whether liberalization policies are beneficial for poverty reduction. The globalization process could also give rise to subtle cultural adaptations at the national and local levels that could have a significant social impact. For instance, the demonstration effect of export processing zones that mainly employ young women could in some localities induce more poor families to send their daughters, in addition to their sons, to school.

The present compendium captures and reflects the pluralism of views that exists on the benefits, risks and drawbacks of globalization and liberalization. In fact, symmetry is sought in this collection of papers through the juxtaposition of "optimistic" and "pessimistic" papers on the main issues concerned. As with the agency participants whose task it was to formulate the conclusions and recommendations of the seminar, it is up to each reader to weigh the arguments of differing authors and reach his or her own final interpretation of the issues.

Given the variety of viewpoints and backgrounds of the inter-agency participants, it was rather remarkable that they were able to agree on the clear, consistent and unambivalent conclusions and recommendations that are listed in the next section of this volume. This set of conclusions and recommendations concentrated on the elements that constitute the globalization and liberalization process; the channels through which the effects of globalization and liberalization are transmitted to the poor; the different categories of positively and negatively affected poor; and measures that can be adopted to enhance the poverty-reducing benefits of the globalization process while mitigating the negative consequences for certain poverty groups. The agency participants who actively contributed to the formulation of the conclusions and recommendations represented the following agencies and departments of the United Nations system: United Nations Department for Economic and Social Information and Policy Analysis (DESIPA); International Labour Organization (ILO); International Monetary Fund (IMF); United Nations Development Programme (UNDP); United Nations Educational, Scientific and Cultural Organization (UNESCO); United Nations Children's Fund (UNICEF); United Nations Industrial Development Organization (UNIDO); United Nations Conference on Trade and Development (UNCTAD); United Nations University (UNU); World Bank (IBRD); World Food Programme (WFP); and World Health Organization (WHO). The views embodied in their conclusions and recommendations, however, are those of the agency participants and do not necessarily coincide with the positions of the agencies which they represented.

The papers in Part I of this volume are concerned primarily with the main issues and constituent elements of the globalization and liberalization process and their effects on poverty. This part of the book includes the main paper: Globalization and liberalization: concepts and issues by Mr. David Woodward. Whereas Part I is conceptually oriented, Part II of the book is more empirically oriented: it focuses on divergent and significant trends and experiences at the level of developing country regions and of specific, individual countries. Indeed, an underlying premise of Part II is that the effects of globalization and liberalization on poverty vary considerably from situation to situation ţ hence no generalization on the implications of globalization and liberalization for poverty fits all developing countries. In Part I, the paper by Mr. David Woodward (independent expert) entitled Globalization and liberalization: concepts and issues is the main reference paper of this compendium. The size alone of his paper takes up about 40 per cent of the book. The paper provides an in-depth, comprehensive description and analysis of the components of the globalization process, their macroeconomic and development effects, and their implications for poverty. While generally of the view that the globalization process is important for reducing aggregate poverty in the world, Mr. Woodward is sceptical and sometimes pessimistic in his paper about various aspects of globalization and liberalization and their effects on poverty. In particular, the author distinguishes between the Asian countries that have most benefitted from globalization and the African and other least developed countries that he believes may be harmed by the globalization and liberalization process. Mr. Woodward also warns in his paper that a balance of payments crisis could be precipitated if foreign direct investment and portfolio flows are not sustained over the long term, in which case they would be increasingly offset by the corresponding outflows. He also makes the point that developing countries specializing in low-skill manufacturing production for export could become susceptible to the fallacy of composition problem that cocoa and coffee producing countries have already experienced. In terms of the social effects of the globalization and liberalization process, Mr. Woodward's paper focuses on government expenditure, urbanization, the environment and gender effects. He assesses the implications of this process for poverty in terms of its effects on real incomes, relative prices, primary health and education, and factors that lie outside the realm of individuals' consumption of goods and services.

The principal companion paper to Mr. Woodward's paper is the paper on Globalization and liberalization: an opportunity to reduce poverty by Mr. Ishrat Husain (World Bank). In this paper, Mr. Husain takes exception to aspects of Mr. Woodward's arguments where he feels Mr. Woodward is unduly negative and pessimistic about the likely effects of globalization and liberalization on growth and poverty. However, Mr. Husain's paper is much more than a critical comment on the Woodward paper. Mr. Husain articulates a clear, unambivalent and positive assessment of the likely effects of globalization and liberalization on poverty. He also identifies some of the transmission channels through which poverty may be reduced as a result of globalization and liberalization.

Like Mr. Husain's paper, the paper by Mr. Zdenek Drabek (World Trade Organization) on Trade and the Uruguay Round: some misconceptions dispelled challenges a number of the views and statements made by Mr. Woodward in his concepts and issues paper. For instance, Mr. Drabek refutes Mr. Woodward's assertion that the level of protectionism by developed countries against developing country exports is high. Mr. Drabek's rejoinder should be read in conjunction with the Uruguay Round and policy chapters of Mr. Woodward's paper. Rather than taking issue with the Woodward paper, Mr. Peter Heller (International Monetary Fund), in his paper on Global financial integration and related domestic liberalization policies, has sought to deepen the analysis on this complex topic. While the globalization of trade and production has been facilitated by the globalization of finance, the latter is not simply a derivative of present trends in trade and production. Global financial integration, moreover, has been propelled by the progressive deregulation and liberalization of controls in financial movements, to the point that money is very ready to move around the world as investors see fit. The main focus of Mr. Heller's paper is on the implications of this process of global financial integration for macroeconomic managers in developing countries. Another paper that focuses to a large extent on macroeconomic policy is the paper entitled Implications of macroeconomic policies for equity and poverty by Mr. Rolph van der Hoeven (International Labour Organization). In his paper, Mr. van der Hoeven reviews current research that indicates that macroeconomic stability contributes positively to long-term growth, except for its effects on fiscal and public expenditure policies and on interest rates. He also summarizes core findings of the so-called new growth theory that stress the importance of public investment in infrastructure and human capital. Mr. van der Hoeven accordingly recommends that macroeconomic policy not only retain those features that support long-term growth but that it also be made more equitable and pro- poor through changes in tax and expenditure policies that favour investment in infrastructure and especially human capital. The strengthening of human capital is also important, inter alia, for enabling low-income developing countries to compete more effectively in the global economy.

The paper by Mr. Santosh Mehrotra (United Nations Children's Fund) on Domestic liberalization policies and public finance: the implications for poverty reviews the trends in the 1980s and early 1990s with respect to government revenue and expenditure in Latin America and Sub- Saharan Africa. His conclusions are consonant with Mr. van der Hoeven's recommendations that government revenues from personal taxes should be increased and that more public expenditure ought to be channelled to basic education and health care.

The paper on Safety nets and compensatory measures by Ms. Carol Graham (independent expert) examines ways in which government expenditure can mitigate the negative impact of globalization and liberalization on certain categories of the population, in particular adversely- affected individuals living below the poverty line. These measures are analyzed from a political economy perspective in terms of their actual and potential efficiency and effectiveness.

As already noted, Part II of the present compendium focuses on regional and national experiences having to do with globalization and liberalization. The first paper in this part of the volume is by Mr. Rajah Rasiah (independent expert), and is on the subject of Globalization and liberalization in East and South East Asia: implications for growth, inequality and poverty. The paper describes and analyzes the experiences of 5 Asian economies: Republic of Korea, Taiwan Province of China, Indonesia, Malaysia and Thailand. As is well-known, these economies have benefitted in a substantial way from the globalization process, although their conversion to liberalization policies has generally only been quite recent. The paper attributes rapid poverty reduction in these economies not only to sustained high levels of economic growth but, in some cases, also to human capital formation and equitable policies in areas such as agrarian reform. While income inequality has generally not been very extreme, Mr. Rasiah's paper points to evidence that the income distribution may be becoming more skewed as liberalization policies begin to take hold. Much of the globalization-related decline in absolute poverty that has taken place to date in the world can be attributed to China. As explained in the paper by Ms. Padma Mallampally (United Nations Conference on Trade and Development) on The importance of foreign direct investment for exports, economic growth and poverty reduction in China, that country has been extremely successful in attracting foreign investment and participating in international trade, which in turn have helped China significantly reduce its incidence of poverty.

The country more than any other that holds the key to any future massive reduction of absolute poverty through globalization and liberalization, however, is India. The paper by Mr. Sumit Roy (independent expert) entitled What potential does India have of benefitting from globalization? discusses the prospects of India reducing its poverty levels in the future if it is successful in becoming more integrated in the world economy.

Generally speaking, Latin American governments have taken swifter and more radical steps to liberalize their economies than Asian governments. However, although promising, their performance in the global economy, like their recovery from the debt crisis of the 1980s, has been more fragile and vulnerable to negative shocks than in the case of the East and South East Asia. The paper by Mr. André Urani (independent expert) entitled Globalization and Liberalization in Latin America: implications for growth, inequality and poverty focuses in particular on Argentina, Brazil and Chile. Mr. Urani points out that poverty has declined (compared with the mid-1980s) as a result of the economic recovery and taming of inflation that have been achieved in the 1990s. He notes, however, that if Argentina and Brazil are to benefit fully and sustainably from the globalization process, they must emphasize deficit-spending containment more than exchange rate overvaluation as a means of keeping inflation under control. Mr. Urani's paper also makes some mention of Mexico, and should be read in conjunction with the paper by Ms. Eugenia Correa that follows. Mexico has been the most dramatic example to date of how fragile economic recovery can turn out to be in Latin America, as well as how risky a developing country's insertion in the globalization process can prove to be. Ms. Eugenia Correa (independent expert) analyzes the Mexican debacle in her paper on Mexico's financial crisis and its effects on income distribution and poverty. An important lesson to be learned is that external financial liberalization policies and import liberalization policies should be carefully phased and sequenced. Mexico's experience is a warning to other Latin American countries such as Argentina and Brazil, and even South East Asian countries such as Malaysia and Thailand, regarding the potential dangers posed by short-term speculative flows. A companion paper that should be read in conjunction with Ms. Correa's paper is Mr. Heller's paper on portfolio flows in Part I of this volume. Whereas the rapidly industrializing economies of East and South East Asia are an inspiration to other developing countries in terms of the gains to be obtained from globalization, and Latin America countries have shown promise, albeit fragile, in this direction, Sub-Saharan Africa remains the region that has failed to date to reap rewards from the globalization process. The paper by Mr. Paul Mosley (independent expert) entitled Globalization and liberalization in Sub-Saharan Africa: implications for growth and poverty points out that the principal agent of globalization in the region continues to be official development assistance (ODA). His conclusions and recommendations focus on ways in which the effectiveness of aid can be enhanced in terms of transforming the economic prospects of Sub-Saharan Africa and raising the level of its human capital, with the twin aims of reducing poverty and enabling the countries to diversify their export base.

The last paper of Part II is by Mr. Fantu Cheru (independent expert), who seeks to answer the question Is the Asian NIEs approach relevant for Sub-Saharan Africa?. Mr. Cheru believes that there are practical limits to the effectiveness of trade liberalization and export promotion drives under conditions of static comparative advantage. He concludes that African governments can learn more from countries such as Indonesia and Malaysia that have augmented their exports of both primary and low-skill manufactured products, rather than countries such as the Republic of Korea that have limited endowments in natural resources but possess a highly educated labour force. The book contains two annexes: the background paper for the inter-agency seminar and the list of participants who attended the seminar. The background paper is a short primer prepared by Mr. Anthony Woodfield (United Nations Conference on Trade and Development) to inform and stimulate thinking on the part of agency participants and the independent experts regarding the range and nature of the issues to be addressed at the inter-agency seminar.

As a final point, it is important to reiterate that the views expressed in the papers of this book are those of the authors and do not necessarily reflect the views of the United Nations system or its constituent parts.

 Last updated on 7 February 1997.

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